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How to manage cash flow in retirement

Whatever the size of your nest egg, retirement will likely mean big changes in your financial life. Sources of income can shift, as can expenses. And financial priorities often change as you move from saving for retirement to generating income from your hard-earned retirement savings.

"Retirement is a milestone and a good opportunity to start fresh," says Ralph Poirier, vice president of cash management at Fidelity Investments. The clean-slate approach, he says, has the potential to make dealing with finances easier, more efficient, and cheaper if you can consolidate accounts and mitigate fees.

Managing your retirement income

To start, consider the ways that retirement can change cash flow. Your weekly or biweekly paycheck may be replaced by income from a variety of sources, including Social Security benefits, pension distributions, and annuity payments. If you are age 70½ or older, you will be required to take minimum distributions from your retirement plans [401(k), 403(b), IRAs, etc.]. Some retirees may even generate income from part-time employment or sales of assets.

All of this means that money is arriving in varying amounts on very different schedules—most likely in the form of a check. To manage these income sources efficiently, you can set up direct deposit services, or use a financial institution that offers remote deposit—meaning you can log on to your computer and scan or snap a photo of a check with a smartphone.

Spending patterns will also likely change, reflecting both your new lifestyle and shifting financial responsibilities. When you retire, often nothing is being withheld for state and federal income taxes, so you may be responsible for any quarterly estimated taxes. Likewise, most retirees generally have to pay health care and other insurance premiums directly to the insurance carrier(s). Some retirees may also find they are traveling more or living in dual residences. All these situations can make monthly bill paying even more complicated.

"It makes sense to simplify and consider new options, given your change in lifestyle," notes Poirier. This may include taking advantage of everyday financial management tools over the phone, on the Web, or via a mobile device. These days, technology makes it easy for people to effectively manage their regular financial transactions from anywhere. Doing so can eliminate worries about paying the mortgage bill, no matter where you happen to be.

Consider a bucket approach

At any point in your retirement, your income streams may be producing more cash than you are spending. If so, you’ll want to think about how to continue to invest that excess cash flow to help meet both your near-term liquidity needs and longer-term needs for both income and growth. When investing, be sure to make liquidity—how quickly you need access to your cash—a central consideration. In general, the more comfortable you are with risk (for reasons of investment horizon and risk tolerance) the greater the level of risk—and potential return—you can afford to pursue.

One approach to consider is to bucket cash for different short- and longer-term needs, such as living expenses, short-term goals, and emergencies. Here are some ways to implement each:

Living expenses: You’ll want to have a portion of your savings easily accessible and liquid for paying everyday living expenses such as groceries, utility bills, and insurance premiums. For these needs, you may want to consider keeping cash or cash equivalents invested in lower-risk, highly liquid investments such as money market funds* or short-term Treasury bills.

Short-term savings goals: If you have short-term savings goals, such as a car purchase or a dream vacation, you may want to consider investing in low-risk vehicles such as Treasury bonds and FDIC-insured CDs with maturities that correspond to the date you need the money.

Emergencies: You should review the adequacy of your emergency fund, or set one up if you have not already done so, keeping as much as six months of expenses for unexpected events, like a roof that needs to be replaced or another hefty bill you did not anticipate. However, one size does not fit all. You will need to take into account your expenses, liabilities, and other individual circumstances in order to determine a dollar figure that suits your needs. Consider investing this money in a mix of highly liquid accounts such as money market funds, and less liquid options such as CDs or conservative bond funds.

How to tie it all together

The key is to make sure your money can be easily accessed, moved, and invested according to your needs, and, ideally, to do so in a way that mitigates overall fees. Some people opt to consolidate by putting all their funds into a group of accounts with a single provider so that money can move easily from one account to another. For example, you might have a basic checking or brokerage account for paying the bills with a variety of electronic options, including mobile or Web payments, electronic funds transfer, mobile check deposit, or similar services.

Look for a provider that offers options to easily transfer money from your retirement accounts, such as IRAs, into your cash account. Some firms will offer periodic withdrawal methods so you can harvest retirement assets or earnings on a schedule that fits your needs. Periodic withdrawals help you create a "just-in-time" income stream and allow remaining assets to produce potential earnings until you need more cash. If you are spending less than you expected, consider setting up access to a sweep system that automatically reinvests excess cash.

Look to mitigate fees and increase efficiency

Retirees can create a similar kind of financial network by linking accounts across different banks and brokerage firms. This may require a little more effort and there could be some additional fees involved. Whatever approach you take, it’s important to choose reliable financial institutions that provide the features you need to make your retirement finances easy to manage, affordable, and flexible.

Consider an account that offers:

Free direct deposit

Mobile deposit

Online access

Free checks

An ATM or "no-fee" debit card

Free transfer services

The ability to speak with a representative by phone or in person

If FDIC coverage is important to you, make sure that your cash accounts don't exceed the maximum covered by the Federal Deposit Insurance Corporation, which insures individual bank accounts for up to $250,000 per institution.

Make sure you have a clear picture of your finances

Finally, the retirement cash management system you create with your providers should offer a comprehensive view of your finances. Being able to access concise, up-to-date reports on your cash balances, transactions, and assets is a basic requirement and can help prevent unpleasant cash flow surprises.

Putting a good cash management system in place now can pay off in the future, Poirier says. For example, it can make it easier for you to handle your finances as you grow older. Make sure you record the specifics, such as direct deposits and automatic transfer schedules, so if you are unable to access your account(s), a properly authorized spouse or third party can make changes as necessary.

Taking the time to think through the "what ifs" of future cash management also means that you get to make the decisions about how you'll be using your financial resources during a retirement that may stretch 30 years or more.

Learn more

Before investing, consider the investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

*An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.

Treasury securities typically pay less interest than other securities in exchange for lower default or credit risk. Treasuries are susceptible to fluctuations in interest rates; therefore, the degree of volatility increases with the amount of time until maturity. As rates rise, prices will typically decline.

Because of the inherent safety and short-term nature of a CD investment, yields on CDs tend to be lower than they are on other higher-risk investments. Like all fixed income securities, CD valuations and secondary market prices are susceptible to fluctuations in interest rates. If interest rates rise, the market price of outstanding CDs will generally decline, creating a potential loss should you decide to sell them in the secondary market. Because changes in interest rates will have the most impact on CDs with longer maturities, shorter-term CDs are generally less impacted by interest rate movements. Since CDs are debt instruments, there is credit risk associated with their purchase, although the insurance offered by the FDIC may help mitigate that risk. Customers are responsible for evaluating both the CDs and the creditworthiness of the underlying issuing institution. CDs sold prior to maturity are subject to a concession and may be subject to a substantial gain or loss due to interest rate changes and other factors. FDIC insurance only covers the principal amount of the CD and any accrued interest. In some cases, CDs may be purchased on the secondary market at a price that reflects a premium to their principal value. This premium is ineligible for FDIC insurance. More generally, FDIC insurance limits apply to aggregate amounts on deposit, per account, at each covered institution. Investors should consider the extent to which other accounts, deposits, or accrued interest may exceed applicable FDIC limits. For more information on FDIC insurance coverage, please visit www.FDIC.gov. Customers are responsible for monitoring their total assets at each of the Program Banks to determine the extent of available FDIC insurance coverage in accordance with FDIC rules. Refer to the FDIC-Insured Cash (Core) Disclosure Statement and list of eligible Program Banks for details. The deposits at Program Banks are not covered by SIPC.

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